Auction

Crude oil prices are determined on a futures exchange market, where traders factor in a wide array of potential impacts on the supply and demand for energy within the economy. As an exchange based commodity, crude oil prices reflect the risk assessment of investors and traders as well as the fundamental levels of supply and demand in the market. Since oil production and demand can be impacted by a number of shocks, such as climate shifts, economic regulation and political conflict, the price of crude oil factors in a wide variety of elements which can potentially impact production.

Some of the fundamentals that factor into the supply and risk factors for crude production include the level of current extraction of crude, as well as the expected future changes in supply. The supply chain for crude oil includes risky extraction and transportation to refineries, which can be impacted by geopolitical instability as well as changes in labor practices. Distribution from raw product to refinery to end user fuel involves transport, taxation and regulation, which can affect prices where oil must be imported from abroad. The United States, for example imports a wide variety of crude oil from Canada, Latin America and the Middle East, resulting in an extended supply chain that can impact oil prices through a wide variety of shocks.

To understand the price of oil on a given day it’s important to understand that oil commodity prices are determined at auction. Both professional traders and suppliers speculate on the price of oil on the market, which factors in risk and shifts in the supply and demand with forward looking equations. Oil traders can also purchase barrels of oil in direct, spot transactions which are less affected by speculation.